What marauding market teaches

NEW YORK
— From Wall Street to Main Street USA, sighs of relief are coming through loud and clear.

The US stock market, which was roaring south a little more than a week ago with the worst dollar losses ever recorded, has crept back - for now at least - holding out the promise of renewed gains. And a continuation of the Great Bull Market of the 1990s and early '00s.

Experts see it as a reality check. The plunge was "a great reminder of why the key to sound investing is to focus on the long-term by diversifying your assets, and to be wary of jumping on any one investment bandwagon," said a letter e-mailed to clients by Charles Schwab &amp; Co.

Diversify. You've heard it a thousand times before: Don't put your (nest) eggs in one basket. Keep an eye on a number of different business sectors.

Shelter and shift. Make certain that if you are linked to a major mutual-fund family, you have access to a money-market fund to which you can shift assets if the market tanks.

To avoid big capital gains, shelter as much of your earnings as possible in retirement accounts, including IRAs and 401(k) or 403(b) plans.

If you have sizable holdings in non-retirement accounts, consider buying into special "tax-advantaged," or "tax-neutral" funds. They are offered by most fund groups.

"We had very few calls from our clients" during the recent market meltdown, says Ric Edelman, a Fairfax, Va.-based financial planner whose firm manages more than $1 billion in assets.

"The reason is that we've been prepping our clients for several years now," he says, "warning them that a crash in technology-oriented stocks was likely to occur," based on their high valuations.

"Don't be afraid of volatility," says Mr. Edelman, whose book "The Truth About Money" has just been reissued by HarperBusiness. "It's the way the market works," shaking out poor-performing stocks, boosting solid firms.

Reasons for the recent market decline are varied, including the need of many investors to sell stocks to raise cash for income-tax payments by April 17 and hints of rising inflation, prompting additional US interest-rate hikes.

There were also worries about the Microsoft antitrust decision being a prelude to more government antitrust lawsuits against high-tech firms.

"We can't be sure that the market won't take another dive; it's not all up, up, and away. But for now, there's more breadth in the market," as more stocks resume growth, says Larry Wachtel, a vice president with investment house Prudential Securities in New York.

What the market decline should have taught us, says Mr. Wachtel, is an old lesson: "When all walkers are moving in one direction, beware." Last year, the Nasdaq Composite Index rose some 85 percent, he notes. This year it was sailing up 25 percent by March.

"That means a 100 percent or more gain in a year. That should have been warning enough that there had to be a correction of some type," says Wachtel.

And despite recent losses, the market is still in good shape in historical terms. For now, says Wachtel, individual investors should be very selective in their investment choices. Go for "quality companies," he says. Look for blue-chip firms, both in Nasdaq stocks and in the Dow Jones Industrial Average and Standard &amp; Poor's 500 Index.

Ironically, says Wachtel, research shows that in the past few weeks - while most large institutional investors have been getting out of overvalued, Nasdaq-linked technology stocks, individual investors have been buying in.

And while the general public has been selling their large-cap, blue-chip stocks or stock funds, he says, the big institutional investors have been buying back into them.

"Be cautious," says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter in Irvington-On-Hudson, N.Y. "The market is still volatile, and there are still many companies that remain vastly overvalued. No one is forcing you to buy into the market.

"If you choose to buy in now," Mr. Jacobs says, "buy quality value stocks, which held up very well" during the recent turmoil. Value stocks are companies trading at levels below the intrinsic value of their total assets. They often have low price-to-earnings ratios.

"If you are going to buy technology issues, buy a company that is a manufacturer of a tangible product," says Peggy Farley, president of investment firm Ascent/Meredith Asset Management in New York.

"Do not invest in anything dotcom," says Ms. Farley with a laugh, noting the heavy losses sustained by Net firms. "Look for growth stocks that have real revenues, real earnings, and that make real products," she says.

Although carefully monitoring her firm's assets under management, Farley is now feeling better about the market for the next few months. "Earnings should continue to be good," she says.

Short of a possible slight uptick in inflation, she sees nothing on the economic horizon that suggests major difficulties for the market through the remainder of the spring and summer.

The challenge is that the spring-summer period is historically one of only tepid market gains.

James Stack, who publishes InvesTech, a market newsletter in Whitefish, Mont., agrees. According to Mr. Stack, if you examine the gains in the Standard &amp; Poor's Index from April 16 through Oct. 31, the annualized historical gain for the market is just 3.6 percent for the period.

That means that anything unusual, such as an unexpected political or economic occurance, can turn the market upside down during those months.

During the period from Nov. 1 to April 15, however, the S&amp;P has had an annualized gain of 16.5 percent, according to analysis by Stack.